With land values and operational profits from US agriculture softening, institutions must take a selective approach to investing in the country’s farmland.
Until recently, prices for US farmland had been rising steadily, alongside high operational profits from working it. From 1995 to 2013, the National Council of Real Estate Investment Fiduciaries’ Farmland Index reported average annual returns of more than 12 percent. In the corn belt state of Kansas, for instance, farmland and buildings went up in value by an average of 16.9 percent during 2011 through to 2014. Correspondingly, AEW Capital Management, which has some $30 billion of real estate assets and securities in North America including farmland, says that over the last decade, US cropland has produced operational returns of 13 percent.
But now, prices are peaking and even contracting in some states. Illinois, Pennsylvania, South Carolina, Minnesota and Utah have seen overall drops in farmland and building values between 0.9 and 2.5 percent in the last five years, according to the United States Department of Agriculture (USDA), a trend driven mainly by a sharp decline between 2014 and 2015. Correlating with this, the USDA is projecting an almost 40 percent drop in net farm income this year, the largest single-year decline since 1983.
Property broker at Property Connections Real Estate, Minor Taylor, specialises in selling Texas farmland, including to investors. He says that interest from US institutional investors has weakened: “They’ve had to lower income rates to 4 percent or so, where they were seeing 6 percent. I’ve been talking to institutional buyers, and I’m telling you that for the most part they just won’t buy at that rate,” he told AgriInvestor.
There are, however, important regional differences. States that rely heavily on growing grain have been struggling, whereas in Oregon for instance, America’s largest hazelnut, loganberries and crimson clover producing state, prices have been rising steadily. American Farmland chief executive Thomas Gimbel, confirming that there is great diversity within the US farmland sector, notes that although corn prices have fallen by over 50 percent in the last two and a half years, almond prices have doubled.
It follows that big institutions like TIAA-CREF and Aberdeen Asset Management, which have indicated that they will continue to invest in US farmland, are likely to make careful choices about which regions and crops they believe will offer the best opportunities in the short term.
In the long term, the picture looks even more complex.
“You could see farmland getting transformed into something more institutional” as has already happened with timber, one fund manager told me. He predicts that over the next decade, more investors will buy up and consolidate farmland as it becomes available because of an ageing farming population and downward pressure on operational profitability they can’t absorb.
A boom in institutional demand could be the result. Farmland is a scarce resource by definition, and research by the University of Illinois refers to a USDA report that says a “speculative bubble forming in farmland markets cannot be ruled out”.
How land prices will develop in a rising interest rate environment is also a debating point. “There have been a number of academic papers which have put forth the idea that rising interest rates would hurt farmland values, but the historical evidence does not support that,” American Farmland’s Gimbel argues. “The fastest period of interest rate increases in the 20th century, up to that point, [was] between 1971 and 1981 – the time of greatest US farmland appreciation.”
Another institutional investor says that its fund managers have been examining the data and finding that farmland as an asset class is beginning to look similar to how real estate behaved four decades ago. If that turns out to be the case, we could see sharper rises and falls in US farmland prices over the coming decades.
But even if volatility increases and becomes a permanent feature of the asset class, investors in US farmland are likely to come back for more. As the world’s top food exporter, the US is simply too important an investment destination to be ignored.
What do you think will happen to US farmland values next year? How will it affect investment decisions? Get in touch at firstname.lastname@example.org